Corporate Spending To Increase, Boost Economy: CIBC Report

There are generally two main culprits when the finger is pointed for Canada’s lacklustre economic growth: our export industry, which has suffered due to an unstable global and U.S. trade market, and a lack of corporate spending in Canada. The latter is due to Canada’s corporations sitting on a massive pile of cash – $1.7 trillion, to be specific – and the lingering mindset to safeguard company coffers from the threat of recession.

However, the latest data from CIBC Economics indicates that corporations are feeling spendier these days, and it may be enough to pull our economy out of its rut.

Growth Will Be Significant – And Fast

The bank’s Composite Indicator of Corporate Canada’s Strength shows that confidence is at an all time high. Combined with corporations’ strong cash position, improving conditions in the U.S. and the newly minted EU CETA deal, CIBC’s Deputy Chief Economist Benjamin Tal states that there’s never been a better time for companies to spend their money.

“While it is widely expected that stronger growth in the U.S. next year will have an upside benefit for Canada, what might surprise many is how quickly and significantly corporate Canada will ramp up spending to capitalize on the long awaited rebound in global demand,” he says.

According to the index, in the past, for every one per cent of growth in the U.S., Canadian corporations ramp up their spending by three per cent. With the current economic environment, that has increased to four per cent, and CIBC forecasts that the U.S. economy will grow 3.2 per cent next year.

But Is It A Sure Thing?

However, not everyone is as optimistic about the future – there’s been enough drama in the U.S. recently to warrant doubts about the viability of such growth forecasts. It’s been less than a week since the nation very narrowly avoided a debt default and reversed a prolonged government shutdown. These events have caused an estimated $2.4-billion loss for their economy, and nothing has been permanently resolved; the stop-gap bill that prompted workers back to work ends on January 15, and the new debt ceiling deadline looms on February 7. The Senate is still at odds on the issues that prompted the shutdown, such as Obamacare, tax increases and sequester spending cuts.

Could We Withstand Another Shutdown?

The Conference Board of Canada’s U.S. Outlook For Autumn highlights how fragile the situation is. While their report points to positive factors like a recovering U.S. housing market and declining fiscal debt, another round of default fears will further weaken global investor confidence in the U.S., with negative implications for all.

“Although the U.S. Congress avoided a default last week, the agreement is a stop-gap measure that failed to solve the basic differences between Democrats and Republicans over taxes and government spending,” said Kip Beckman, the Board’s principal economist. “If we go through the same drama in January and February, our projection for stronger growth next year would be in jeopardy.”